A Bangladesh Bank study suggests removal of the interest-rate caps at least in medium-to longer terms to help develop market-based financial sector in the country, at a time when donor pleas are rife for such reform.
The study also notes that there is an uptrend in inflation in recent times which might necessitate the lifting of the interest-rate caps, as savers' deposit incomes are eaten up by high prices.
It recommends that in order to strengthen the monetary- transmission channels, Bangladesh Bank may start to target the short-term interest rates, specifically, the call-money rate, as practised in peer central banks in the region.
Bangladesh Bank executive director Dr Julhas Uddin, one of the authors of the study, told the FE that call-money or short-term rates should be targeted as it will impact the long-term ones.
"If we set a short-term target, for example, 5.0 per cent, if there is a shortage of liquidity in the market that fuels up interest rates, then the central bank will inject funds into the market and vice versa," Dr Julhas adds.
The BB-conducted study is titled 'Impact Assessment of Interest Rate Caps and Potential Policy Options: Bangladesh Perspective'. The authors of this paper are Executive Director Dr Md. Julhas Uddin, Director and Joint Director of the Research Department of Bangladesh Bank Dr Sayera Younus and Tarek Aziz.
The objective of this study is to examine the current status of the lending and deposit rates after the imposition of a 9.0-percent cap on lending rates and 6.0 per cent on deposit rates effective from April 1, 2020, and impact of the controls on the macro-and bank-specific variables.
Meanwhile, a currently visiting International Monetary Fund (IMF) delegation assessing the country's creditworthiness before deciding on a USD4.5 billion worth of loan also makes a point on the interest caps while stressing numerous other reforms.
The BB study finds that the recent lower lending rates following the interest- rate cap has been a blessing for the industry sector receiving the lion's share--nearly 60 per cent to be precise--of total private-sector credit disbursement by the scheduled banks while shares to agriculture, CMSME, and others have suffered a slight setback.
However, the empirical results show the profitability measures in terms of ROA (return on assets) and ROE (return on equity) show no sign of deceleration of profits after the reduction in lending rate, rather it increased as a result of the cap.
The relationships with the non-performing loans are also significant and positive.
Policy implications of this study show although the interest-rate cap is against the market-economy concept meant for increased economic activity, Bangladesh Government together with the central bank came forward and put pressure on the banking community to lower the whole term structure of interest by imposing restrictions on the interest rates.
"Bangladesh experience shows that although banks are charging lower interest rate, they are enjoying profits at the cost of lower deposit rate for the savers," says the study report.
The non-performing loans also came down compared with the earlier periods, it further reads.
The central bank also needs to be careful regarding the quality of loans.
Evidence shows that the interest rate for the large industries is lower than the agriculture and the CMSME sectors, which raises concern that imposing a cap may be benefiting the rich more than the small and medium borrowers.
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